ASE Technology Holding Co., Ltd. Q1 FY2022 Earnings Call

I'm Kenneth Hsiang, the Head of Investor Relations for ASE Technology Holdings. Welcome to our first quarter 2022 earnings release. Thank you for attending our conference call today. Please refer to our Safe Harbor notice on Page 2. All participants consent to having their voices and questions broadcast via participation in this event. If participants do not consent, please disconnect at this time. I would like to remind everyone that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially. For the purposes of this presentation, our dollar figures are generally stated in New Taiwan Dollars, unless otherwise indicated. As a Taiwan-based company, our financials are presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards, including those presented by our subsidiary using Chinese GAAP. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation. For today's call, I'm joined by Joseph Tung, our CFO. During the call, I will be going over our financial results and outlook. Joseph will be available to answer questions during the Q&A session that follows. As a reminder, we disposed of ASE Inc.'s China sites at the end of 2021. For our financial results presented here, in addition to our legal entity results, we will also be including additional slides on a pro forma basis or as if the disposition of ASE Inc.'s China sites had already occurred. We believe the pro forma results give additional more meaningful information, which would assist in providing comparability of our financial results. During the first quarter, our ATM business continued to be heavily loaded. Revenues came in slightly ahead of our expectations. During the quarter, there were some customers who were reducing their forecasts, but those customers were outpaced by other customers increasing their forecasts. From a sector perspective, certain sectors do appear to be faring better such as high-performance computing, networking, and automotive. And despite the slight volatility, net-net, there was no significant variation from our previous outlook. Our EMS business also had revenues that came in ahead of our expectations. During the quarter, stronger-than-anticipated demand was driven by our SiP and traditional EMS services. Logistical issues from component and chip shortages appeared to ease prior to getting worse from China's COVID mitigation practices. All in all, our EMS business fared well despite the manufacturing environment becoming more challenging.

On Pages 3 and 4, you will find our first quarter consolidated results with historical results on a legal entity and pro forma basis. The first quarter financial results are the same on a legal entity and pro forma basis. On Page 3 is the consolidated legal entity P&L. For the fourth quarter 2021, the disposed sites represented $6.8 billion of revenue, $1.4 billion of gross profits, and $0.9 billion of operating profit. As a percentage, the disposed sites represented 4% of each fourth quarter 2021 revenues, gross profit, and operating profit. For the same period last year, the sites disposed represented $5.6 billion of revenue, $1 billion of gross profit, and $0.5 billion of operating profit. As a percentage, the disposed entities were 5% of each revenues, gross profit, and operating profit. On Page 4 is our first quarter results compared with a pro forma basis historical results. For the first quarter, we recorded fully diluted EPS of $2.92 and basic EPS of $3.01. Consolidated net revenue decreased 13% sequentially while increasing 27% year-over-year. We had a gross profit of $28.5 billion with a gross margin of 19.7%. Our gross margin increased by 0.8 percentage points sequentially and by 1.4 percentage points year-over-year. The sequential margin improvement is principally the result of lower EMS business mix. The annual increase is primarily the result of higher profitability of our ATM business. Our operating expenses decreased sequentially by $0.3 billion during the first quarter to $12.4 billion, primarily as a result of lower bonus and profit-sharing expenses issued during the quarter. On a year-over-year basis, our operating expenses increased by $1.9 billion, mainly from the increase in scale of both our ATM and EMS businesses. Our operating expense percentage increased 1 percentage point sequentially to 8.6% from 7.6%. On an annual basis, our operating expense percentage declined 0.6 percentage points from 9.2%. Operating profit was $16.1 billion, down $2.7 billion sequentially, while up $5.7 billion year-over-year. Operating margin was 11.2%, declining 0.1 percentage points sequentially. This relatively moderate decline was principally the result of lower EMS product mix. Operating margin increased 2.1 percentage points on an annual basis as a result of higher loading and profitability from our ATM business. During the quarter, we had a net nonoperating gain of $0.6 billion. The nonoperating gain was primarily from our net foreign exchange hedging activities, offset in part by net interest expense of $0.4 billion. Tax expense for the quarter was $3.3 billion. The effective tax rate for the first quarter was 19.7%. We expect a full year effective tax rate of 20%. Net income for the quarter was $12.9 billion, representing a decline of $1.6 billion sequentially and an improvement of $4.9 billion year-over-year.

On the bottom of the page, we provide key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit, excluding PPA expenses, would be $29.4 billion with a 20.4% gross margin. Operating profit would be $17.3 billion with an operating margin of 12%. Net profit would be $14.1 billion with a net margin of 9.7%. Basic EPS, excluding PPA expenses, would be $3.28.

On Pages 5 and 6 are our ATM P&L with historical results on a legal entity and pro forma basis. It is worth noting here that the ATM revenue reported here contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. During the first quarter, our ATM business continued to run at a highly loaded rate. Our Advanced Packaging business remains strong. However, as expected, we did experience some mild first quarter seasonality from our wirebond business. On Page 5 is the legal entity ATM P&L. From a legal entity perspective, our ATM business declined 9%, primarily as a result of the disposition of ASE Inc.'s China sites. For the fourth quarter 2021, the disposed sites were $6.8 billion and 7% of revenue, $1.4 billion and 6% of gross profits and $0.9 billion and 5% of operating profit. For the same period last year, the disposed sites were $5.6 billion and 8% of revenue, $1 billion and 6% of gross profits and $0.5 billion or 5% of operating profit. On Page 6 is our pro forma basis, ATM P&L. For the first quarter 2022, revenues for our ATM business were $84 billion, down $1.2 billion from the previous quarter and up $15.9 billion from the same period last year. This represents a 1% decrease sequentially and a 23% increase year-over-year. The year-over-year gross profit margin improvement was primarily attributable to higher loading, improved efficiency and a favorable ASP environment, offset in part by NT dollar appreciation. During the first quarter, operating expenses were $9.1 billion, flat sequentially and up $1.5 billion or 20% year-over-year. The 20% annual increase was lower than our 23% net revenue growth during the same period. As such, the year-over-year increase was primarily driven by a larger scale of business. Our operating expense percentage was 10.8%, up 0.1 percentage points sequentially and down 0.3 percentage points year-over-year. During the first quarter, operating profit was $14 billion, representing a decline of $1.2 billion quarter-over-quarter and an improvement of $4.6 billion year-over-year. Operating margin was 16.7%, declining 1.2 percentage points sequentially and improving 2.9 percentage points year-over-year. The NT dollar exchange rate did not have a significant impact on our ATM sequential margins. However, on a year-over-year basis, we estimate that the strengthening NT dollar had a 0.75 percentage point negative impact. Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 28.5%, and operating profit margin would be 18%. On Page 8 is our pro forma ATM revenue by market segment. We would like to mention here that we expect the automotive segment to grow significantly during the year and for many years to come. We believe that this increase is not primarily driven by shortage catch-ups. Instead, we believe that overall semiconductor content increases have accelerated recently. Further, the content increase is being amplified by a new wave of outsourcing from IDMs, which have traditionally kept most production in-house. Given the necessity of quality and scalability for our automotive products, we further believe that the market expansions will only be made available to Tier 1 suppliers, and within those suppliers, primarily ASE. On Page 9, you will find our pro forma ATM revenue by service type. During the quarter, we saw strength in our Advanced Packaging services, which increased 3 percentage points. Wirebonding exhibited some seasonality, dropping 2 percentage points. From a forward-looking perspective, we expect our Test and Advanced Packaging businesses, including bumping, flip chip and fan-out to continue to ramp faster than the corporate average during the coming year. On Page 10, you can see the first quarter results of our EMS business. The information we provide here in regard to USI may differ materially from the information directly provided by our A-share-listed subsidiary as they report independently using Chinese GAAP. During the quarter, demand was stronger than anticipated, driven by stronger-than-expected demand for both our traditional EMS and SiP services. Component and chip shortages continue to persist throughout the first quarter. Overall, operating conditions became more challenging as China's COVID mitigation strategy ramped. We do have countermeasures in place to continue our EMS production within China. We remain confident of the policies and procedures we have put in place to protect our employees and the overall manufacturing environment. But the overall macro situation remains dynamic. For our EMS business, during the first quarter, revenues decreased 25% sequentially and increased 28% year-over-year. Revenues were somewhat ahead of where we expected, primarily as a result of higher-than-expected SiP and traditional EMS business. Our EMS gross profit was $5.4 billion, declining $1.7 billion sequentially and increasing $1.4 billion year-over-year. The sequential gross profit decline is largely seasonal. The year-over-year improvement is largely related to more EMS business. Gross profit margin for our EMS business unit was 8.8%, which is an improvement of 0.1 percentage points sequentially and 0.4 percentage points year-over-year. The margin improvements are primarily the result of product mix changes and improved operating efficiency. Our EMS business unit's first quarter operating expenses were $3.2 billion, decreasing $0.3 billion sequentially and increasing $0.4 billion year-over-year. Operating expenses declined primarily as a result of lower employee profit-sharing expenses. Operating expenses increased annually as a result of higher scale of operations. Our EMS unit's operating expense percentage was 5.2%, up 0.9 percentage points sequentially and down 0.7 percentage points year-over-year. The operating expense percentage increase is primarily due to seasonally lower revenue. On an annual basis, the operating expense percentage decline is due to increased scale of business with a lower increase in operating expenses or more operating leverage. Our EMS operating profit declined $1.4 billion sequentially while growing $1 billion year-over-year. The sequential decline is due to seasonality of the business. The annual increase is the result of a higher scale of operations. Our EMS operating margin was 3.6%, which is down 0.8 percentage points sequentially and up 1.1 percentage points year-over-year. On the bottom half of the page, you will find a graphical representation of our EMS revenue by application. Outside of automotive applications, most other applications had a seasonal decline in revenue during the first quarter. Our consumer segment's drop was stronger as it was tied to the seasonality of underlying high-volume SiP products. On Page 11, you will find key line items from our balance sheet. At the end of the quarter, we had cash, cash equivalents, and current financial assets of $89.1 billion. Our total interest-bearing debt was $225.1 billion. Total unused credit lines amounted to $285.9 billion. Our EBITDA for the quarter was $30.7 billion. Net debt to equity was 52%. On Page 12, you will find our equipment capital expenditures. Machine and equipment capital expenditures for the first quarter in U.S. dollars totaled $443 million, of which $311 million were used in packaging operations, $96 million in test operations, $26 million in EMS operations, and $10 million in interconnect material operations and others. We continue to provide our EBITDA in U.S. dollars here as a reference. We believe that the company's EBITDA relative to our equipment CapEx serves as a key financial performance metric for the company. Looking out into the second quarter, we continue to believe the business environment remains relatively healthy. We still believe we have a strong growth year ahead of us. Our view of double the logic semiconductor industry growth remains unchanged. And though we understand there are certain macro elements that may cause future retuning of the logic semiconductor growth outlook, we believe that amongst back-end service providers, we are our customers' first choice. From a macro concerns perspective, worldwide inflation and the Russia-Ukraine war's impact on overall electronics demand remains relatively unknown. Our outlooks and corporate plans are tied to the outlooks and expectations of our customers. And as mentioned earlier, some customers in certain sectors have reduced their overall outlooks. However, these reductions have been fully offset by increases from other customers and other sectors. If we look at our top 5 customers during the past quarter, we had a net positive forecast adjustment. And even if there is adjustment to demand, we believe our customers will flee to security, which benefits us the most. Further, we do see China's COVID-mitigation strategy as a concern. We currently have adequate immediate workarounds within our China operations to continue running but secondary and tertiary impacts to factory supplies and raw materials can reach far beyond the PRC. Obviously, mitigation duration and severity will directly correlate to how severe the repercussions are along the entire supply chain. We currently believe our factories have effective workarounds and alternate vendors during the second quarter to avoid manufacturing disruptions. Finally, Taiwan-centric issues, such as the recent COVID surge, are also creating factory-level operational complexities. Our Taiwan factories are taking appropriate measures to prevent the spread of the disease within our factories. Taiwan's pragmatic approach should create manageable disruptions in Taiwan due to COVID mitigation. However, such policies may make running our various Taiwan factories less efficient. Due to these factors, we do see a near-term increase in running costs related to the suboptimal macro environment. At this time, we expect the higher-cost environment to last between 1 to 2 quarters. Even with extra costs, we continue to expect improving full-year gross margins. For our EMS business, a large portion of our manufacturing is in China. The overall operating conditions there have become more challenging with China's COVID-mitigation strategy, especially staffing and logistics. We do have countermeasures in place to continue our EMS production within China. For our business, the second quarter is generally part of the seasonal trough. And as such, keeping up with slow season demand should not pose a significant challenge. For the near term, we remain confident that the policies and procedures we have put in place will protect our employees and our manufacturing environment. At this time, we do not see major disruptions to our production. But like our ATM business, we do see some incremental costs. With that said, our guidance for the second quarter is as follows: for our ATM business on a pro forma basis in U.S. dollar terms, our ATM second quarter 2022 business level should be slightly above fourth quarter 2021 levels. On a pro forma basis, our ATM second quarter 2022 gross margin should be slightly above our first quarter 2022 gross margin. For our EMS business, in U.S. dollar terms, our EMS second quarter 2022 business level should be similar to first quarter 2022 levels. Our EMS second quarter 2022 operating margin should be slightly lower than first quarter 2022 levels.

Our first question is from Mr. Randy Abrams of Credit Suisse.

Okay. Yes. Good result and outlook considering all the COVID disruptions. First question, it sounds like the EMS business is tracking better than you were expecting a few months ago, just given macro has changed a bit. And I believe USI also on their call talked about a bit better outlook. Could you give the view for growth this year for that business? And maybe discuss a bit more on where you're seeing the strength or upside in EMS.

I think the overall EMS business of ours has continued to remain strong, although there will be some foreseeable disruptions particularly coming into the second quarter and may last to the end of the second quarter or even into, to some degree, the third quarter. But all in all, I think the overall momentum remains to be strong. We continue to make inroads in terms of expanding our said projects with new customers. The traditional EMS business, we continue to see strong momentum, particularly in the automotive sector. All in all, I think the overall business environment, all the business momentum continues to be strong for the year, same as our ATM business.

Right. Is it in the same automotive? How much of a driver? I know I see ATM, I think, last quarter, 40% growth this year. Is it starting to move the needle for EMS or still fairly small?

Yes. I think the growth for this year in terms of automotive will be even stronger than last year. And I think the U.S. has already put out a target of reaching about $1 billion revenue by 2024, which is actually a year earlier than our previous target. So I think they're seeing very strong momentum in that area, particularly with the addition of Asteelflash who has a fairly large and growing exposure in the automotive sector that the putting the two together really makes the momentum much stronger now.

I wanted to ask about two factors affecting the margin. What is the associated cost? Is there a way to estimate that cost? You indicated that costs might be higher for one to two quarters. How significant is that impact, and is it reflected in the gross margin or the operating margin? Additionally, regarding the NT dollar, when you mentioned that the gross margin is slightly above what we saw in the first quarter, does that include a specific currency assumption?

Yes. I believe we considered all factors. Firstly, we are coming off a very strong first quarter, and our margin was significantly higher than we initially expected. As we move into the second quarter, due to the disruptions we are experiencing, we will adopt a more cautious approach in projecting our margin situation. The additional costs arising from the COVID disruptions come from various sources, including the expenses required to protect our employees. We anticipate increases in some logistics costs and material costs. These factors are exerting considerable pressure on our cost side. It would be overly simplistic not to factor these considerations into our margin expectations for the quarter.

I'm curious about the environment. Earlier this week, TI significantly lowered its guidance by $500 million, likely due to slowing shipments caused by factory disruptions. From your perspective, are you observing any signs of customers experiencing downstream disruptions or perhaps a drop in demand? Have you noticed any impact on our customers' ability to maintain steady flows despite these issues?

Well, I think the overall order looks very healthy. But then there's a lot of different situations that may have a negative impact on the actual delivery of the parts or the material that was needed for production. So I think selective customers may have different views on how things are going with them. But as a whole, particularly the EMS, particularly in the China area, we are seeing some logistics difficulties in terms of moving our products out and moving the materials in. So there are a lot of, I think, obstacles that we need to go through. So far, we have been managing this quite well, and therefore, we haven't seen that much of an impact on the overall. Whatever impact there is in terms of the revenue side, we do feel confident that we can recuperate in the later part of the year.

Great. And my final question on CapEx, the last few quarters have been around $425 million to $440 million. Are you now updated on your CapEx outlook, considering the original guidance was around $2 billion plus? It seems there have been a lot of front-end challenges.

Randy?

Can you hear me?

Yes. Randy?

Well, let me answer this question. I think for the whole year, our CapEx remains at what we've been saying before, it's about $2 billion level. But the composition of it will be somewhat different from last year. I think this year, I think we will increase the percentage of our test investment. I think the overall breakdown will shift to about 51% for assembly, 34% for test, 11% for EMS, and then another 3% for material.

Our next question is from Mr. Gokul Hariharan.

Could you provide more details about the customers who have started to show some weakness? What dynamics are you observing, and which segments are experiencing this decline? Are you filling that capacity with other segments? Is this primarily occurring in your wirebond business, or is it more prevalent in the flip chip and bumping areas? Additionally, you mentioned that your logic semiconductor growth is doubling, and the first half is performing well. Do you see any potential risks in the second half due to the end market weaknesses, or do you believe your order book is sufficient to offset any downturn in the consumer segments during that period?

I believe it's widely recognized that we're experiencing some softness in the Android sector. The cell phone and certain consumer products appear to be relatively weaker compared to other areas. However, from our perspective, the overall situation remains quite healthy. We continue to see strong momentum in high-performance computing, networking, and automotive sectors. Even in the weaker areas, the growth in applications and integrated circuit content will help support overall unit growth. Additionally, an increasing trend toward outsourcing, particularly from IDMs and in the automotive sector, will drive our business. Taking everything into account, we expect to see healthy unit growth this year. As Ken pointed out earlier, during this uncertain time, many customers will prioritize security. A company like ours, with secure capacity and strong sourcing power, is likely to be the preferred choice for customers. Altogether, this gives us strong confidence in achieving growth this year. While we are a bit cautious regarding second-quarter margins, we anticipate continued sequential growth in our margins. In the first quarter, we already exceeded our historical peak of 27% gross margins, and we expect that trend to persist, ultimately reaching a new peak for gross margin for the year.

Understood. So just a follow-up on that. On automotive, could you talk a little bit about how much is automotive now as a percentage of ATM? I know that your kind of combined consumer industry, automotive, and others is 30-plus percent. But what is automotive alone? And how do you see that evolve in the next 4, 5 years, given that a lot of tailwinds are coming in terms of outsourcing, dollar content growth, et cetera. Is it something like 25% of revenues could be coming from automotive in the next 3, 4 years?

Yes, the overall momentum remains very strong at this time. Last year, our ATM automotive business grew by about 6%, and we expect it to rise to over 7% this year. We are on track to reach the $1 billion mark this year. A similar momentum is evident in our EMS segment, which experienced approximately 50% growth, and we anticipate further expansion in that growth rate this year. Overall, EMS will likely account for about 7% of our total revenue in automotive. Looking long-term, as we continue to automate our factories, we expect an increasing influx of automotive business. The key focus in automotive isn't on existing products but rather on new applications and chips that are emerging. This represents not only new business opportunities for us but also areas where IDMs will likely shift toward outsourcing. With automotive chips having higher reliability demands, customers are more inclined to choose a Tier 1 supplier like us that offers the necessary capacity, cutting-edge technology, and quality to fulfill those production needs.

We have a question from Mr. Rick Hsu of Daiwa Securities.

Yes. This is Rick. Can you guys hear me?

Yes.

Okay. Right. So I guess the first question is still the housekeeping for Joseph. What's your cost of the utilization rates across the packaging, testing, and bumping for Q1 and also for the coming quarter?

I think bumping is full. And as a whole, in terms of packaging, it's 80% to 85% and will continue to be so in the second quarter. Testing is staying above 80%. It will continue to be 80% above in the second quarter as well.

Okay. And another question is about your full year guidance for the year 2022. I remember one quarter ago, you guys talked about the global semi ex-memory growth was about 5% to 10% this year. And ASE was going to double that growth. Is this asset position still held?

Absolutely. We're still anticipating doubling the growth in the logic semiconductor market for the year. If we expect overall growth of 5% to 10%, this could translate to 10% to 20% growth for us, potentially even more. In this uncertain environment, we believe that expanding our market share is more likely.

We have a question from Mr. Bruce Lu of Goldman Sachs.

Can you hear me?

Yes.

Okay. I mean let me follow up with Rick's question. I mean TSMC just revised up the 5 years semi ex-memory growth from 4% to high single digit for the next 5 years. So does that imply that ASE will also grow double than semi ex-growth, which is 8% for the next 5 years as well?

Well, certainly, yes, I guess the short answer is.

I'm glad to hear that response. My second question is regarding the information Joseph just provided about the gross margin for the ATM business, which is expected to grow in 2022 despite the uncertainty. Could you clarify your assumptions for the currency this year and how you’re calculating things in a like-to-like manner? You have additional costs related to COVID and increases in material costs, so what are your assumptions in that regard? Ultimately, I'm asking what the like-to-like basis for margin expansion looks like for 2022.

I think we'll definitely exceed 28% for our ATM gross profit margin. The currency plays a role, but its impact depends on fluctuations in exchange rates. Currently, we’re basing our assumptions on the existing rates. If the currency is favorable, the margin could be higher than what I've mentioned. However, we are facing increased logistics costs due to the COVID situation and ongoing geopolitical events, which significantly affect logistics, material supplies, and health-related investments. Additionally, energy costs will also influence the margin. Therefore, we are being somewhat conservative in our projections. While we are confident about margin expansion, we are setting our goals at a level lower than what we would ideally like, considering all these factors.

Let me make it clear. I mean you have all the dynamic cost pressures. So do you believe that your position is stronger now when you see the inflated cost either from like order confirmation or raw material costs, you're able to pass it to your customer, which is the main reason why you maintain the profitability target or you got that?

Well, I think both. I think in terms of our scale, in terms of our leadership, in terms of customers who prefer to go for secure capacity and technology. I think that give us a very good protection over our margin and pricing. But at the same time, there's a lot of macro events that will have an impact on the overall how you run a business. It's not necessarily on the to pricing of materials or parts, but also a lot of the logistics and all around the costs that we need to bear. That includes labor as well. So there's a lot of uncertainties here. So it's very difficult to quantify how much of the impact on these macro events we have on the cost side. But judging from our own operational situation, I think we are still confident that we will have margin expansion, maybe not necessarily to the level that we would like to have. But then we need to start somewhere, right? And so we're setting that this quarter, we will be closing in on 28. And for the whole year, we say we want to be above that level.

Understand. Just double-check that the gross margin sensitivity for the ATM alone to the currency, what is that?

I'm sorry?

The currency sensitivity for the ATM margin because you have the negative...

1% is about 40 basis points. 1% of movement will have a 40 basis point impact.

We have an online question from Laura Chen. She asks for more details about your automotive business, including the revenue contribution and growth for 2021, as well as your outlook for this year. She also wants to know if you foresee any potential weaknesses in the auto business due to the current lockdowns in China and demand uncertainties in Europe. Additionally, she inquires about the applications seeing the strongest growth in Advanced Packaging.

In terms of Advanced Packaging, we are seeing strong momentum in both flip chip and System in Package (SiP). Overall, Advanced Packaging, which includes flip chip and SiP, has the highest growth rate for the year. For our automotive segment, we are targeting approximately $1 billion in revenue, which would represent over 7% of our overall ATM business for the year, showing significant growth from last year. We anticipate this momentum to continue in the foreseeable future. The focus is shifting away from legacy products to new applications and chips that are emerging and creating new business opportunities for us. Most of these new ventures are being outsourced by Integrated Device Manufacturers (IDMs), which we previously managed in-house. This creates a strong business potential for us. In the automotive sector, customers prioritize durability and reliability when selecting suppliers. Given the quality, technology, and level of automation we have in our factory, we believe we are the preferred supplier for new automotive chips. Therefore, we expect very strong momentum moving forward.

Next question is from Mr. Gokul Hariharan.

I have a follow-up question. Previously, you mentioned that you expected sequential momentum in ATM to continue throughout the year, with growth in every quarter. Is that still your expectation, considering some of the recent changes in demand?

Yes. Based on the forecast we are receiving, our customer base remains stable and robust. Therefore, we still anticipate sequential growth in our business and an improvement in our margins.

Understood. To elaborate on Bruce's question, it seems you are experiencing some cost pressures in Q2. Are you able to pass these costs on to your customers in Q2, or are there delays with some of these cost elements? Over the past 18 to 24 months, we have certainly seen some cost pass-throughs and price increases due to high demand and tight supply. Are these still occurring, or is there not much room left for increasing prices?

We continue to experience a favorable pricing environment. Compared to our competitors, we have the strongest position in terms of safeguarding our margins and pricing. Due to the ongoing macroeconomic events, there could be some impact on the overall cost structure. Certain costs can be passed on to customers, while others may not, depending on the nature of the cost increases. In the long run, we believe we have the best production in our pricing structure. The situation is very dynamic right now, and we are willing to pass cost increases onto our customers when possible. However, we must also consider our long-term customer relationships. It is important not to come across as overly opportunistic, as that could harm these relationships in the long run. There is a delicate balance in managing these cost pressures while also nurturing our customer connections.

Next question is from Mr. Frank Lee of HSBC.

Can you hear me?

Yes.

Okay. I just wanted to ask, I guess, a question about the Advanced Packaging, the flip chip. The major demand drivers, are there any that you can highlight to besides what we're seeing on 5G handsets? Is that still the major driver?

Actually, we're seeing handsets as well as automotive, it's going into flip chip as well. And networking, HPC, these are all major users of our flip chip.

Okay. Great. I noticed that the consumer segment in your EMS experienced a slight decline, which you attributed to seasonality. However, comparing the first quarter of 2021 to this year's first quarter, it appears that the consumer mix was significantly higher last year. I'm trying to understand how much of the difference can be attributed to seasonality regarding this weakness.

I believe one reason is that the other sectors are experiencing stronger momentum this year compared to last year, which has somewhat overshadowed the communication segment. Regarding the consumer aspect, were you referring to that specifically?

Yes.

So the consumer part of it did get a little bit diluted by the other sector's growth. The consumer this year is performing actually better than what we were expecting because of some shift in our market share.

We have another question from Mr. Randy Abrams of Crédit Suisse again.

I want to inquire about another aspect of market share. After divesting the China footprint, your factory exposure is now lower than IC ATM. Is this disruption due to competitors gaining more capacity in China temporary, or is there an opportunity to gain some market share or allocate resources if there are further disruptions in the China footprint?

I'm sorry, I didn't quite get your question. Can you repeat that again?

Yes. If you're seeing any benefit or transfer of orders? I mean you mentioned customers in times of uncertainty. So if you're gaining any market share either near term or could be a midterm help with a bit less footprint now in China, like if they continue this hard zero COVID policy?

I think although it may not be published yet, our market intelligence indicates that we are observing weaker performances from our peers in China this quarter. The lockdown and overall geopolitical situation seem to be affecting them. As a result, we are noticing some business shifting toward us from China.

And when you mentioned geopolitical, is that the international customers? Just trying to keep overseas source for export.

I think both factors are important. International companies are increasingly coming to us and moving significantly into China. Additionally, the lockdown situation in China is causing difficulties for Chinese customers in placing their orders.

Okay. Great. And for the mature business, most of the emphasis is on advanced. For wirebonding, is it the assumption you still stay at a full level or that's an area you get a bit of underutilization? And are you still at the point you still need to add a moderate amount of binders this year?

Well, as a whole, I think our wirebond is still being maintained at a very high loading level. But I think in the China operation, where we still have our factory, because of the pandemic situation, it did have some impact on the wirebonding utilization. But that's a very small percentage to our overall...

Okay. And the last question I had just on we're seeing the fabless, I mean, they're having a higher target inventory level, and it's been building up a number of them. Do you see that as an overhang? Or is it your view it's more wafer bank, like not necessarily packaged ship inventory? Or I guess do you see any overhang from the build-up of inventory if that slows or reverses?

During this uncertain time, it’s understandable that inventory levels are increasing. It's a normal occurrence to see inventory levels higher than before. In our own business, we are observing that wafer banks are holding up as customers seek to secure their capacity. Some of the Advanced Packaging is limited by substrates, which is creating a bottleneck. We can only do so much to meet the current demand.

Okay. It sounds like your perspective is that the substrate issue will persist for several years, or do you see any changes in that when looking at the midterm?

The substrate situation is unlikely to improve in the near future. I believe it will take quite a bit of time, possibly 2 to 3 years, before we start to see some easing in this area.

We have no more questions on the call. We have another question from Randy.

Sorry, I didn't. I'm okay.

Okay. Thank you very much, and to summarize, we came up with a very strong first quarter, things continue to look very healthy for us throughout the year. We'll continue to have sequential growth in both revenue and margin. We are facing some challenges in the short term, but we're managing well at this point. So thank you very much. I'll see you next quarter.